NU Online News Service, April 29, 12:13 p.m. EDT

Financial impairments at 11 property and casualty insurance companies were severe enough to trigger regulatory action last year, but none of the problems were the direct result of catastrophe losses, A.M. Best reports.

Against the backdrop of news headlines about 2011 catastrophe activity and market implications, researchers at the Oldwick, N.J.-based rating agency released a report finding that 2010 impairments were dominated by commercial-lines insurers whose difficulties arose from deficient loss reserves and inadequate pricing.

Best's latest update in a series of studies on insurer financial impairments finds seven commercial carriers among the 11 impaired in 2010—four liability and three workers' compensation insurers. The remaining four were a private-passenger auto insurer, two title insurers and one financial-guaranty insurer, Best says.

No homeowners or residential-property insurers became impaired in 2010, compared to 2009 when six such companies failed.

According to the report, 54.5 percent of the 2010 impairments (six companies) were primarily caused by deficient reserves or inadequate pricing, while 18 percent (two companies' impairments) were directly attributable to investment losses.

Historically, over a study time horizon dating back to 1969, Best finds that deficient loss reserves have been the dominant cause of impairments—fueling 40 percent of the problems. In the 1969-2010 time period, rapid growth was the next most frequent impairment-driver, fueling nearly 14 percent of them.

During a webinar broadcast on PropertyCasualty360.com yesterday, two professional-liability insurance executives—Paul Romano, president of OneBeacon Professional Insurance, and John Chace, OBPI senior vice president and chief underwriting officer—referenced to these conclusions in prior A.M. Best impairment studies, warning agents and brokers to understand operating philosophies of the companies they do business with.

Specifically referring to a 2004 version of the A.M. Best study, which analyzed impairments between 1969 and 2002, Chace noted that three medical-malpractice companies highlighted in that prior report "managed themselves out of the market" by "growing too rapidly" during the last soft market.

One impaired medical-malpractice carrier, which he did not identify, grew from writing $499 million in 2002 to over $1 billion in 2004, and its loss ratio soared from 52 to 118 over the same time period, Chace said during the webinar titled "You Can Make Market Cycles Work For You."

Romano, referring to conditions in the current market, said, "We are competing with companies with quality financials—with 'A' or better ratings from A.M. Best," but he warned producers to dig deeper.

"How much of their prior-year redundancy are they using to offset current year? And can [you] rely on them to maintain stable pricing levels going forward if in fact problems become evident in their financial results?" he asked, referring specifically to Best's conclusion about reserve deficiencies driving the bulk of impairments.

Special Reports /

2010 Insolvencies Reserve-Driven, Not Cat-Driven: A.M. Best

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